PD Editorial: Banking sins too big to disclose

| January 30, 2013

Sonoma Valley Bank officials cried foul in mid-2010 when federal regulators shuttered three branches and arranged for Westamerica Bank to take over the bank's deposits. Bank officials argued that regulators were being overly zealous and the closures were unwarranted. But now, it appears that federal regulators may have had good cause for what they did.

More than that, the Federal Deposit Insurance Corp. has banned Sean Cutting, the former bank's president and CEO, and loan officer Brian Melland from the banking industry for "reckless, unsafe or unsound banking practices" and a "pattern of misconduct" that damaged the bank.

What are those reckless practices? The FDIC is not saying. Yet, according to its decision, released Friday, Melland allegedly benefited financially from his actions. The FDIC has imposed a $10,000 fine on Cutting and a $2,500 fine on Melland.

So why are their transgressions being kept secret? It's not clear. Chalk it up as further evidence of the absurd contradictions that exist between so-called white collar offenses and other types of crime.

It's a given that someone accused of stealing $1,000 from a bank would be put on trial and have every detail of their crime exposed to the public and a jury. But if someone drives a bank into the ground — as these allegations suggest — and does significant damage to a regional economy, regulatory laws provide a level of privacy that defies explanation.

The public may yet learn the details of these "breaches of fiduciary duty," thanks to lawsuits filed by shareholders and other investors who say they lost roughly $70 million combined in the failure of the bank.

Investors say the bank's troubles began when it made high-risk real estate loans — more than $40 million in all — to Marin County developer Bijan Madjilessi and his associates. According to a 2011 investigation by The Press Democrat, Melland reportedly helped arrange the loans for Madjlessi while he was soliciting and accepting money for a energy drink company he was launching. Some of those who provided him funds were associated with the developers, including Madjlessi's wife.

Eventually, according to the investigation, Madjlessi and his business partners defaulted on at least $34 million in loans in connection with two Sonoma County housing projects and a self-storage facility in Santa Rosa.

Many financial institutions were caught with bad loans during the economic downturn. But what made this situation particularly egregious is that even as Madjlessi and his partners were defaulting on loans in 2008, the bank reportedly gave them extensions and, in at least one case, loaned more money. A few months later, the bank began accepting bailout funds through the Troubled Asset Relief Program. The federal government lost at least $20 million in the bank's collapse.

Given all of this, it comes as no surprise that Sonoma Valley Bank became the only Sonoma County bank to collapse during the economic downturn. The only surprise is that two top officials, who stand accused of "reckless, unsafe or unsound banking practices," are being protected from full public scrutiny. Banning a banking official, potentially for life, is a significant punishment. Sonoma County residents at least deserve a more complete explanation for why the decision was made.